Question 1

A company gives the following information: Margin of Safety Rs.7,50,000, Total Cost Rs.7,75,000, Margin of Safety (Qty.) 15,000 units, Break Even Sales in Units 5,000 units. You are required to CALCULATE:

Accepted Answer

**Given Data:**
Margin of Safety (₹) = ₹7,50,000 | Total Cost = ₹7,75,000 | Margin of Safety (Qty.) = 15,000 units | Break Even Sales = 5,000 units

**(i) Selling Price per Unit:**
Total Sales Units = Break Even Units + Margin of Safety Units = 5,000 + 15,000 = **20,000 units**
Margin of Safety (₹) = Margin of Safety (Qty.) × Selling Price per unit
₹7,50,000 = 15,000 × SP → **Selling Price = ₹50 per unit**

**(ii) Profit:**
Total Sales (₹) = 20,000 units × ₹50 = ₹10,00,000
Profit = Total Sales − Total Cost = ₹10,00,000 − ₹7,75,000 = **₹2,25,000**

**(iii) Profit/Volume (P/V) Ratio:**
Using the relationship: **Profit = Margin of Safety × P/V Ratio**
P/V Ratio = Profit ÷ Margin of Safety (₹) = ₹2,25,000 ÷ ₹7,50,000 = **30%**

**(iv) Break Even Sales (in Rupees):**
Break Even Sales (₹) = Break Even Units × Selling Price = 5,000 × ₹50 = **₹2,50,000**
(Cross-check: Total Sales − Margin of Safety = ₹10,00,000 − ₹7,50,000 = ₹2,50,000 ✓)

**(v) Fixed Cost:**
Contribution = Total Sales × P/V Ratio = ₹10,00,000 × 30% = ₹3,00,000
Variable Cost = Total Sales − Contribution = ₹10,00,000 − ₹3,00,000 = ₹7,00,000
Fixed Cost = Total Cost − Variable Cost = ₹7,75,000 − ₹7,00,000 = **₹75,000**
(Cross-check: Break Even Sales × P/V Ratio = ₹2,50,000 × 30% = ₹75,000 ✓)

Question 2

ZX Ltd. has furnished the following information: Budgeted working days 25, production 20,000 units, fixed overheads Rs. 3,00,000. Actual March 2020: working days 27, production 22,000 units, fixed overheads Rs. 3,10,000. Budgeted fixed overhead rate is Rs. 10.00 per hour. Actual hours worked in March 2020 were 31,500. In relation to fixed overheads, CALCULATE:

Accepted Answer

**Fixed Overhead Variances for ZX Ltd. (March 2020)**

**Key Standard Figures Derived:**
Budgeted hours = Rs. 3,00,000 ÷ Rs. 10 per hour = **30,000 hours**
Budgeted hours per day = 30,000 ÷ 25 = **1,200 hours/day**
Standard hours per unit = 30,000 ÷ 20,000 = **1.5 hours/unit**
Fixed OH absorption rate per unit = Rs. 3,00,000 ÷ 20,000 = **Rs. 15 per unit**
Standard hours for actual output = 22,000 × 1.5 = **33,000 hours**
Revised budgeted hours (for actual days) = 27 × 1,200 = **32,400 hours**

**(i) Efficiency Variance**
= (Standard hours for actual output − Actual hours worked) × Fixed OH rate per hour
= (33,000 − 31,500) × Rs. 10 = **Rs. 15,000 (Favourable)**

**(ii) Capacity Variance**
= (Actual hours worked − Revised budgeted hours) × Fixed OH rate per hour
= (31,500 − 32,400) × Rs. 10 = **Rs. 9,000 (Adverse)**

**(iii) Calendar Variance**
= (Revised budgeted hours − Budgeted hours) × Fixed OH rate per hour
= (32,400 − 30,000) × Rs. 10 = **Rs. 24,000 (Favourable)**

**(iv) Volume Variance**
= (Standard hours for actual output − Budgeted hours) × Fixed OH rate per hour
= (33,000 − 30,000) × Rs. 10 = **Rs. 30,000 (Favourable)**

Verification: Volume Variance = Efficiency (15,000 F) + Capacity (9,000 A) + Calendar (24,000 F) = Rs. 30,000 (F) ✓

**(v) Expenditure Variance**
= Budgeted Fixed Overheads − Actual Fixed Overheads
= Rs. 3,00,000 − Rs. 3,10,000 = **Rs. 10,000 (Adverse)**

Overall check: Total Fixed OH Variance = Volume (30,000 F) + Expenditure (10,000 A) = Rs. 20,00…

Question 3

A company is undecided as to what kind of wage scheme should be introduced. The following particulars have been compiled in respect of three workers:

Worker I: Actual hours 380, Hourly rate Rs.40, Product A 210 units, Product B 360 units, Product C 460 units
Worker II: Actual hours 100, Hourly rate Rs.50, Product C 250 units
Worker III: Actual hours 540, Hourly rate Rs.60, Product A 600 units, Product B 1350 units

Standard time allowed per unit: Product A 15 minutes, Product B 20 minutes, Product C 30 minutes. For piece rate, each minute is valued at Rs. 1/-

You are required to COMPUTE the wages of each worker under:

Accepted Answer

**Computation of Wages under Three Schemes**

**Preliminary: Standard Time (Time Allowed) for Actual Output**

Product A standard time = 15 min/unit; Product B = 20 min/unit; Product C = 30 min/unit. Each minute = Rs.1 for piece rate.

**Worker I:** A: 210×15 = 3,150 min; B: 360×20 = 7,200 min; C: 460×30 = 13,800 min → Total = 24,150 min = **402.5 hours**

**Worker II:** C: 250×30 = 7,500 min = **125 hours**

**Worker III:** A: 600×15 = 9,000 min; B: 1,350×20 = 27,000 min → Total = 36,000 min = **600 hours**

---

**(i) Guaranteed Hourly Rate Basis**

Wages = Actual Hours × Hourly Rate

**Worker I:** 380 × Rs.40 = **Rs.15,200**
**Worker II:** 100 × Rs.50 = **Rs.5,000**
**Worker III:** 540 × Rs.60 = **Rs.32,400**

---

**(ii) Piece Work Earnings (Guaranteed at 75% of Basic Pay; Hourly Rate if < 50%)**

Piece Work Earnings = Standard Minutes Produced × Rs.1/min

**Worker I:** 24,150 × Re.1 = Rs.24,150. Basic Pay = Rs.15,200; 75% = Rs.11,400; 50% = Rs.7,600. Since Rs.24,150 > Rs.11,400 → **Wages = Rs.24,150**

**Worker II:** 7,500 × Re.1 = Rs.7,500. Basic Pay = Rs.5,000; 75% = Rs.3,750; 50% = Rs.2,500. Since Rs.7,500 > Rs.3,750 → **Wages = Rs.7,500**

**Worker III:** 36,000 × Re.1 = Rs.36,000. Basic Pay = Rs.32,400; 75% = Rs.24,300; 50% = Rs.16,200. Since Rs.36,000 > Rs.24,300 → **Wages = Rs.36,000**

All three workers exceed 75% of basic pay, so piece work earnings apply in full.

---

**(iii) Rowan Premium Bonus Scheme**

**Formula:** Total Wages = Basic Pay + Bonus, where **B…

Question 4

A Ltd has calculated a predetermined overhead rate of Rs.22 per machine hour for its Quality Check (QC) department. The following overhead expenditures at various activity levels had been estimated: Rs.3,38,875 at 14,500 machine hours; Rs.3,47,625 at 15,500 machine hours; Rs.3,56,375 at 16,500 machine hours. You are required to:

Accepted Answer

**Part (i): Variable Overhead Absorption Rate**

Using the **High-Low Method** on the given data points:

- At 14,500 hours → ₹3,38,875
- At 15,500 hours → ₹3,47,625
- At 16,500 hours → ₹3,56,375

Change in cost per 1,000 hours = ₹3,47,625 − ₹3,38,875 = **₹8,750** (consistent across all intervals).

**Variable Overhead Rate = ₹8,750 ÷ 1,000 = ₹8.75 per machine hour**

---

**Part (ii): Estimated Total Fixed Overheads**

Using the cost equation at 14,500 hours:
Fixed Overheads = Total Cost − (Variable Rate × Hours)
= ₹3,38,875 − (₹8.75 × 14,500)
= ₹3,38,875 − ₹1,26,875

**Estimated Total Fixed Overheads = ₹2,12,000**

(Verified at 15,500 hrs: ₹2,12,000 + ₹1,35,625 = ₹3,47,625 ✓)

---

**Part (iii): Budgeted Level of Activity**

The **predetermined overhead rate** = ₹22 per machine hour
This comprises: Variable rate + Fixed rate per hour
Fixed rate per hour = ₹22 − ₹8.75 = **₹13.25 per machine hour**

Budgeted hours = Fixed Overheads ÷ Fixed Rate per hour
= ₹2,12,000 ÷ ₹13.25

**Budgeted Activity = 16,000 machine hours**

---

**Part (iv): Under/Over Absorption of Overheads**

Actual machine hours worked = 14,970
Overheads **Absorbed** = 14,970 × ₹22 = ₹3,29,340
Actual Overheads **Incurred** = ₹3,22,000

Difference = ₹3,29,340 − ₹3,22,000 = **₹7,340**

Since absorbed > incurred, this is **Over-absorption of ₹7,340**.

---

**Part (v): Departmental vs. Blanket (Factory-Wide) Absorption Rate**

**Arguments FOR Departmental Absorption Rates:**
(a) **Accuracy in product costing**: …

Question 5

ZA Ltd. is a manufacturer with the following cost structure per unit: Product A (Direct Materials Rs.100, Direct Labour Rs.30, Production Overheads Rs.30, Quantity 20,000 units); Product B (Direct Materials Rs.80, Direct Labour Rs.40, Production Overheads Rs.40, Quantity 40,000 units); Product C (Direct Materials Rs.80, Direct Labour Rs.50, Production Overheads Rs.50, Quantity 60,000 units). The company was absorbing overheads on direct labour hours basis. A management accountant has suggested ABC system with cost pools: Stores Receiving (Cost Rs.5,92,000, Driver: Purchase Requisitions); Inspection (Cost Rs.17,88,000, Driver: Production Runs); Dispatch (Cost Rs.4,20,000, Driver: Orders Executed); Machine Setup (Cost Rs.24,00,000, Driver: Number of Setups). Details: Product A (360 Setups, 1…

Accepted Answer

**Activity-Based Production Cost of Products A, B, and C under ABC System**

**Step 1: Identify Total Activity Driver Volumes**

The total driver quantities across all products are:
- Purchase Requisitions: 300 + 450 + 500 = **1,250**
- Production Runs: 750 + 1,050 + 1,200 = **3,000**
- Orders Executed: 180 + 270 + 300 = **750**
- Number of Setups: 360 + 390 + 450 = **1,200**

**Step 2: Calculate Cost Driver Rates**

- Stores Receiving Rate = ₹5,92,000 ÷ 1,250 = **₹473.60 per requisition**
- Inspection Rate = ₹17,88,000 ÷ 3,000 = **₹596.00 per production run**
- Dispatch Rate = ₹4,20,000 ÷ 750 = **₹560.00 per order**
- Machine Setup Rate = ₹24,00,000 ÷ 1,200 = **₹2,000.00 per setup**

**Step 3: Overhead Absorbed per Product (Total)**

Product A: (300 × 473.60) + (750 × 596) + (180 × 560) + (360 × 2,000) = 1,42,080 + 4,47,000 + 1,00,800 + 7,20,000 = **₹14,09,880**

Product B: (450 × 473.60) + (1,050 × 596) + (270 × 560) + (390 × 2,000) = 2,13,120 + 6,25,800 + 1,51,200 + 7,80,000 = **₹17,70,120**

Product C: (500 × 473.60) + (1,200 × 596) + (300 × 560) + (450 × 2,000) = 2,36,800 + 7,15,200 + 1,68,000 + 9,00,000 = **₹20,20,000**

Verification: ₹14,09,880 + ₹17,70,120 + ₹20,20,000 = ₹52,00,000 ✓ (equals total cost pools)

**Step 4: Overhead Cost per Unit**

- Product A: ₹14,09,880 ÷ 20,000 = **₹70.49 per unit**
- Product B: ₹17,70,120 ÷ 40,000 = **₹44.25 per unit**
- Product C: ₹20,20,000 ÷ 60,000 = **₹33.67 per unit**

**Step 5: Activity-Based Production Cost per Unit**

| Cost …

Question 6

Following figures have been extracted from the books of M/s A&R Brothers: Opening stock (1st March 2020): Raw materials Rs.6,06,000, Finished goods Rs.3,59,000. Closing stock (31st March 2020): Raw materials Rs.7,50,000, Finished goods Rs.3,09,000. Work-in-process: 1st March Rs.12,56,000, 31st March Rs.14,22,000. Purchase of raw materials Rs.28,57,000, Sale of finished goods Rs.1,34,00,000, Direct wages Rs.37,50,000, Factory expenses Rs.21,25,000, Office and administration expenses Rs.10,34,000, Selling and distribution expenses Rs.7,50,000, Sale of scrap Rs.26,000. You are required to COMPUTE:

Accepted Answer

**Cost Statement of M/s A&R Brothers for March 2020**

**(i) Value of Material Consumed:** Opening stock of raw materials is added to purchases and closing stock is deducted. Material Consumed = ₹6,06,000 + ₹28,57,000 − ₹7,50,000 = **₹27,13,000**

**(ii) Prime Cost:** Prime cost comprises material consumed and direct wages (all **direct costs**). Prime Cost = ₹27,13,000 + ₹37,50,000 = **₹64,63,000**

**(iii) Cost of Production:** Factory/works expenses are added to prime cost; opening WIP is added and closing WIP is deducted. **Sale of scrap** is deducted as it reduces factory cost. Cost of Production = ₹64,63,000 + ₹21,25,000 + ₹12,56,000 − ₹14,22,000 − ₹26,000 = **₹83,96,000**

**(iv) Cost of Goods Sold (Cost of Production of Goods Sold):** Opening finished goods stock is added to cost of production and closing finished goods stock is deducted to arrive at the cost of goods actually sold during the period. Cost of Goods Sold = ₹3,59,000 + ₹83,96,000 − ₹3,09,000 = **₹84,46,000**

**(v) Cost of Sales:** **Office & administration expenses** and **selling & distribution expenses** are period costs added after cost of goods sold to compute the total cost of sales. Cost of Sales = ₹84,46,000 + ₹10,34,000 + ₹7,50,000 = **₹1,02,30,000**

**(vi) Profit:** Profit = Sales − Cost of Sales = ₹1,34,00,000 − ₹1,02,30,000 = **₹31,70,000 (Profit)**

Question 7

A company manufactures a product from raw material purchased at Rs.180 per kg. Handling cost is Rs.1,460 plus freight of Rs.940 per order. Incremental carrying cost of inventory is Rs.2.5 per kg per month. Cost of working capital finance on inventory investment is Rs.18 per kg per annum. Annual production is 1,00,000 units and 2.5 units are obtained from one kg of raw material. Assume 360 days in a year. Required:

Accepted Answer

**Annual Demand and Cost Parameters**

Annual production = 1,00,000 units; raw material yield = 2.5 units per kg.

**Annual demand (D)** = 1,00,000 ÷ 2.5 = **40,000 kg per annum**

**Ordering cost per order (Co)**
Handling cost + Freight = Rs. 1,460 + Rs. 940 = **Rs. 2,400 per order**

**Carrying cost per kg per annum (Cc)**
Incremental carrying cost = Rs. 2.5 × 12 = Rs. 30 per kg p.a.
Cost of working capital finance = Rs. 18 per kg p.a.
Total Cc = Rs. 30 + Rs. 18 = **Rs. 48 per kg p.a.**

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**(i) Economic Order Quantity (EOQ)**

Using the EOQ formula:
**EOQ = √(2 × D × Co ÷ Cc)**
= √(2 × 40,000 × 2,400 ÷ 48)
= √(4,00,00,000 ÷ 48)... see working notes
= **2,000 kg**

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**(ii) Frequency of Ordering**

Number of orders per year = D ÷ EOQ = 40,000 ÷ 2,000 = **20 orders per year**

Time between orders = 360 ÷ 20 = **18 days**

The company should place an order every **18 days**.

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**(iii) Minimum Discount Required for Quarterly Ordering**

Under quarterly ordering: 4 orders per year, order size = 40,000 ÷ 4 = 10,000 kg.

The **working capital finance cost** (Rs. 18 per kg at price Rs. 180) reflects a **rate of 10%** of purchase price. When price changes to P = (180 − d), this cost becomes 0.10 × P per kg p.a.

New carrying cost per kg = Rs. 30 + 0.10P = (48 − 0.10d) per kg p.a.

**Total cost at EOQ (no discount):**
Purchase + Ordering + Carrying = 40,000 × 180 + 48,000 + 48,000 = **Rs. 72,96,000**

**Total cost at Quarterly ordering (price = 180 − d):**
= 40,000(180 − d…

Question 8

G K Ltd. produces product 'XYZ' which passes through Process-A and Process-B. Year ending 31st March 2020: Process A: 40,000 units introduced at cost Rs. 3,60,000, Material consumed Rs. 2,42,000, Direct wages Rs. 2,58,000, Manufacturing expenses Rs. 1,96,000, Output 37,000 units, Normal wastage 5%, Scrap value Rs. 15 per unit, Selling price Rs. 37 per unit. Process B: Material consumed Rs. 2,25,000, Direct wages Rs. 1,90,000, Manufacturing expenses Rs. 1,23,720, Output 27,000 units, Normal wastage 10%, Scrap value Rs. 20 per unit, Selling price Rs. 61 per unit. Additional info: 80% of Process-A output passed to next process, balance sold; entire Process-B output sold; Indirect expenses Rs. 4,48,080; neither process is a responsibility centre. Required:

Accepted Answer

**Process A Account**

Process A receives 40,000 units at ₹3,60,000. Total debits include material ₹2,42,000, direct wages ₹2,58,000, and manufacturing expenses ₹1,96,000. **Total cost = ₹10,56,000.**

**Normal wastage** = 5% × 40,000 = 2,000 units; scrap realisation = 2,000 × ₹15 = ₹30,000 (credited).
**Expected output** = 40,000 − 2,000 = 38,000 units.
**Actual output** = 37,000 units; **Actual loss** = 3,000 units.
**Abnormal loss** = 3,000 − 2,000 = **1,000 units**.

**Cost per unit (Process A)** = (10,56,000 − 30,000) ÷ 38,000 = ₹10,26,000 ÷ 38,000 = **₹27 per unit**.

Process A Account balances at 40,000 units / ₹10,56,000 on both sides. Credit side: Normal wastage 2,000 units ₹30,000 | Abnormal loss 1,000 units ₹27,000 | Output 37,000 units ₹9,99,000.

**Process A output distribution:** 80% × 37,000 = **29,600 units transferred to Process B**; 20% × 37,000 = **7,400 units sold** at ₹37.

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**Process B Account**

Process B receives 29,600 units from Process A at ₹27 = ₹7,99,200. Additional debits: material ₹2,25,000, direct wages ₹1,90,000, manufacturing expenses ₹1,23,720. **Total cost = ₹13,37,920.**

**Normal wastage** = 10% × 29,600 = 2,960 units; scrap realisation = 2,960 × ₹20 = ₹59,200.
**Expected output** = 29,600 − 2,960 = 26,640 units.
**Actual output** = 27,000 units; **Actual loss** = 2,600 units.
Since actual loss (2,600) < normal loss (2,960), **Abnormal Gain = 360 units**.

**Cost per unit (Process B)** = (13,37,920 − 59,200) ÷ 26,640 = ₹12,78,720 ÷ 26…

Question 9

The Trading and Profit and Loss Account of a company for the year ended 31-03-2020 shows: To Materials Rs.26,80,000, Wages Rs.17,80,000, Factory expenses Rs.9,50,000, General administrative expenses Rs.4,80,200, Selling Expenses Rs.2,50,000, Preliminary expenses written off Rs.70,000, Net profit Rs.2,19,800. By Sales (50,000 units) Rs.62,00,000, Closing stock (2,000 units) Rs.1,50,000, Dividend received Rs.80,000. In Cost Accounts: Factory expenses allocated to production at 20% of Prime Cost; General administrative expenses absorbed at 10% of factory cost; Selling expenses charged at Rs.10 per unit sold. Required: PREPARE the Costing Profit and Loss Account and RECONCILE the Profit/Loss with the profit shown in the Financial Accounts.

Accepted Answer

**Step 1: Determine Production Units**

Assuming no opening stock: Production = Sales + Closing Stock = 50,000 + 2,000 = **52,000 units**.

**Step 2: Costing Profit and Loss Account**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| To Materials | 26,80,000 | By Sales (50,000 units) | 62,00,000 |
| To Wages | 17,80,000 | By Closing Stock (2,000 units @ ₹113.22) | 2,26,431 |
| To Factory Overhead (20% of Prime Cost) | 8,92,000 | | |
| To Admin Overhead (10% of Factory Cost) | 5,35,200 | | |
| To Selling Overhead (50,000 × ₹10) | 5,00,000 | | |
| To **Net Profit (Costing)** | **39,231** | | |
| **Total** | **64,26,431** | **Total** | **64,26,431** |

**Step 3: Reconciliation Statement (Costing Profit to Financial Profit)**

| Particulars | ₹ | ₹ |
|---|---|---|
| **Profit as per Cost Accounts** | | **39,231** |
| **Add:** Over-absorption of Admin Overhead (5,35,200 – 4,80,200) | 55,000 | |
| **Add:** Over-absorption of Selling Overhead (5,00,000 – 2,50,000) | 2,50,000 | |
| **Add:** Dividend received (in FA, not CA) | 80,000 | **3,85,000** |
| | | **4,24,231** |
| **Less:** Under-absorption of Factory Overhead (9,50,000 – 8,92,000) | 58,000 | |
| **Less:** Preliminary Expenses written off (in FA, not CA) | 70,000 | |
| **Less:** Excess of Closing Stock in CA over FA (2,26,431 – 1,50,000) | 76,431 | **(2,04,431)** |
| **Profit as per Financial Accounts** | | **2,19,800** |

**Verification of Financial Profit:** Sales (62,00,000) + Closing Stock (1,50,000) + Dividend (80,000) – Materials…

Question 10

During FY 2019-20, GP Limited produced 30,000 units at 50% capacity. Cost structure at 50% level: Direct Material Rs.150/unit, Direct Wages Rs.50/unit, Variable Overheads Rs.50/unit, Direct Expenses Rs.30/unit, Factory Expenses (25% fixed) Rs.40/unit, Selling and Distribution Exp. (80% variable) Rs.20/unit, Office and Administrative Exp. (100% fixed) Rs.10/unit. For FY 2020-21: variable costs increase by 10%, fixed costs increase by 15%, selling price remains Rs.400 per unit. Required:

Accepted Answer

**Part (i): Budgeted Profit for FY 2019-20 (at 50% capacity = 30,000 units)**

Selling Price per unit = ₹400. Total cost per unit = ₹150 + ₹50 + ₹50 + ₹30 + ₹40 + ₹20 + ₹10 = **₹350 per unit**.

Budgeted Sales = 30,000 × ₹400 = **₹1,20,00,000**
Budgeted Total Cost = 30,000 × ₹350 = **₹1,05,00,000**
**Budgeted Profit (FY 2019-20) = ₹15,00,000**

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**Part (ii): Expense Budget for FY 2020-21 on Marginal Cost Basis**

**Step 1 — Segregate Fixed and Variable costs (FY 2019-20, 30,000 units):**

Variable cost per unit: Direct Material ₹150 + Direct Wages ₹50 + Variable OH ₹50 + Direct Expenses ₹30 + Factory Exp (75% variable) ₹30 + S&D Exp (80% variable) ₹16 = **₹326/unit**

Total Fixed Costs: Factory Exp (25%) = 30,000 × ₹10 = ₹3,00,000 | S&D Exp (20%) = 30,000 × ₹4 = ₹1,20,000 | Office & Admin (100%) = 30,000 × ₹10 = ₹3,00,000 | **Total = ₹7,20,000**

**Step 2 — Apply increases for FY 2020-21:**
Variable cost per unit: ₹326 × 1.10 = **₹358.60/unit**
Fixed costs: ₹7,20,000 × 1.15 = **₹8,28,000**

**Expense Budget for FY 2020-21 (Marginal Costing Basis)**

| Particulars | Rate/unit (₹) | 50% — 30,000 units (₹) | 60% — 36,000 units (₹) |
|---|---|---|---|
| **Variable Costs:** | | | |
| Direct Material | 165.00 | 49,50,000 | 59,40,000 |
| Direct Wages | 55.00 | 16,50,000 | 19,80,000 |
| Variable Overheads | 55.00 | 16,50,000 | 19,80,000 |
| Direct Expenses | 33.00 | 9,90,000 | 11,88,000 |
| Factory Exp (variable 75%) | 33.00 | 9,90,000 | 11,88,000 |
| S&D Exp (variable 80%) | 17.…

Question 11

KR Resorts (P) Ltd. offers three types of rooms: Deluxe Room (100 rooms, 90% occupancy), Super Deluxe Room (60 rooms, 75% occupancy), Luxury Suite (40 rooms, 60% occupancy). Rent: Super deluxe is 2 times deluxe, luxury suite is 3 times deluxe. Annual expenses: Staff salaries Rs.780.00 lakhs, Lighting/Heating/Power Rs.350.00 lakhs, Repairs/Maintenance/Renovation Rs.220.00 lakhs, Linen Rs.60.00 lakhs, Laundry charges Rs.34.00 lakhs, Interior decoration Rs.85.00 lakhs, Sundries Rs.36.28 lakhs. Attendant wage Rs.500 per day per occupied room. Depreciation: Building 5% on Rs.900 lakhs, Furniture/Fixtures 10% on Rs.90 lakhs, Air conditioners 10% on Rs.75 lakhs. Profit to be provided at 25% on total taking. Assume 360 days per year. You are required to DETERMINE the tariff to be charged for diffe…

Accepted Answer

**Hotel Tariff Determination — KR Resorts (P) Ltd.**

**Step 1: Calculation of Occupied Room Days (Annual)**

- Deluxe Rooms: 100 × 360 × 90% = **32,400 room days**
- Super Deluxe Rooms: 60 × 360 × 75% = **16,200 room days**
- Luxury Suites: 40 × 360 × 60% = **8,640 room days**
- Total occupied room days = 57,240

**Step 2: Conversion to Equivalent Deluxe Room Days**

Let the tariff of Deluxe Room = x. Then Super Deluxe = 2x and Luxury Suite = 3x.

- Deluxe: 32,400 × 1 = 32,400
- Super Deluxe: 16,200 × 2 = 32,400
- Luxury Suite: 8,640 × 3 = 25,920
- **Total Equivalent Deluxe Room Days = 90,720**

**Step 3: Statement of Annual Cost**

| Particulars | ₹ Lakhs |
|---|---|
| Staff Salaries | 780.00 |
| Lighting / Heating / Power | 350.00 |
| Repairs / Maintenance / Renovation | 220.00 |
| Linen | 60.00 |
| Laundry Charges | 34.00 |
| Interior Decoration | 85.00 |
| Sundries | 36.28 |
| Depreciation — Building (5% on ₹900 L) | 45.00 |
| Depreciation — Furniture & Fixtures (10% on ₹90 L) | 9.00 |
| Depreciation — Air Conditioners (10% on ₹75 L) | 7.50 |
| **Total Fixed & Semi-Fixed Costs** | **1,626.78** |
| Attendant Wages (57,240 × ₹500) | 286.20 |
| **Total Annual Cost** | **1,912.98** |

**Step 4: Total Taking (including 25% Profit on Total Taking)**

Since Profit = 25% on total taking, Cost = 75% of total taking.

Total Taking = ₹1,912.98 / 0.75 = **₹2,550.64 lakhs**

**Step 5: Tariff per Equivalent Deluxe Room Day**

Rate = ₹2,550.64 × 1,00,000 / 90,720 = **₹2,811.55 per room…

Question 12

SHOW Journal entries for the following transactions assuming cost and financial accounts are integrated: (1) Materials issued: Direct Rs. 6,50,000, Indirect (to factory) Rs. 2,30,000; (2) Allocation of wages (25% indirect) Rs. 9,00,000; (3) Under/Over absorbed overheads: Factory (Over) Rs. 60,000, Administration (Under) Rs. 50,000; (4) Payment to Creditors (Trade payables) Rs. 9,00,000; (5) Collection from Debtors (Trade receivables) Rs. 8,00,000.

Accepted Answer

**Journal Entries in Integrated Cost and Financial Accounts**

In an **integrated accounting system**, both cost and financial transactions are recorded in a single set of books using control accounts such as Stores Control, WIP Control, Wages Control, Overhead Control, and Costing P&L Account.

**(1) Materials Issued**

Direct materials are charged to **Work-in-Progress (WIP) Control A/c**, and indirect materials are charged to **Factory Overhead Control A/c**; both are credited to **Stores Control A/c**.

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Work-in-Progress Control A/c Dr | 6,50,000 | |
| Factory Overhead Control A/c Dr | 2,30,000 | |
|   To Stores Control A/c | | 8,80,000 |
| *(Being direct and indirect materials issued)* | | |

**(2) Allocation of Wages**

Total wages = ₹9,00,000. Indirect wages = 25% × ₹9,00,000 = ₹2,25,000; Direct wages = ₹6,75,000. Direct wages go to **WIP Control A/c**; indirect wages go to **Factory Overhead Control A/c**.

| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Work-in-Progress Control A/c Dr | 6,75,000 | |
| Factory Overhead Control A/c Dr | 2,25,000 | |
|   To Wages Control A/c | | 9,00,000 |
| *(Being wages allocated — 75% direct, 25% indirect)* | | |

**(3) Under/Over Absorbed Overheads**

**Over-absorbed Factory Overhead** (₹60,000): Overhead absorbed into production exceeds actual overhead incurred, creating a credit balance in Factory Overhead Control. This surplus is transferred to **Costing P&L A…

Question 13

A company can make any one of 3 products X, Y, or Z in a year. It can exercise its option only at the beginning of each year. Relevant information: Product X (Selling Price Rs.100/unit, Variable Costs Rs.60/unit, Market Demand 3,000 units, Production Capacity 2,000 units); Product Y (Selling Price Rs.120/unit, Variable Costs Rs.90/unit, Market Demand 2,000 units, Production Capacity 3,000 units); Product Z (Selling Price Rs.120/unit, Variable Costs Rs.70/unit, Market Demand 1,000 units, Production Capacity 900 units). Fixed Costs Rs.3,00,000. Required: COMPUTE the opportunity costs for each of the products.

Accepted Answer

**Computation of Opportunity Costs for Products X, Y, and Z**

Since the company can produce only **one product per year**, the opportunity cost of choosing any product is the **total contribution of the best alternative foregone**. Fixed costs of ₹3,00,000 are common to all products and do not affect the relative ranking.

The **effective units** producible for each product = minimum of (Market Demand, Production Capacity).

**Product X:** Contribution per unit = ₹100 − ₹60 = **₹40**. Effective units = min(3,000; 2,000) = 2,000 units. Total Contribution = 2,000 × ₹40 = **₹80,000**.

**Product Y:** Contribution per unit = ₹120 − ₹90 = **₹30**. Effective units = min(2,000; 3,000) = 2,000 units. Total Contribution = 2,000 × ₹30 = **₹60,000**.

**Product Z:** Contribution per unit = ₹120 − ₹70 = **₹50**. Effective units = min(1,000; 900) = 900 units. Total Contribution = 900 × ₹50 = **₹45,000**.

Ranking by total contribution: X (₹80,000) > Y (₹60,000) > Z (₹45,000).

**Opportunity Cost of Product X** = Best contribution from alternatives (Y or Z) = Contribution of Y = **₹60,000**

**Opportunity Cost of Product Y** = Best contribution from alternatives (X or Z) = Contribution of X = **₹80,000**

**Opportunity Cost of Product Z** = Best contribution from alternatives (X or Y) = Contribution of X = **₹80,000**

Thus, Product X has the lowest opportunity cost (₹60,000) and itself generates the highest contribution (₹80,000), making it the **optimal choice** as its net advantage (₹8…

Question 14

DISCUSS the accounting treatment of Idle time and overtime wages.

Accepted Answer

**ACCOUNTING TREATMENT OF IDLE TIME AND OVERTIME WAGES**

**Idle Time:**

Idle time refers to the time for which wages are paid to workers but no output is obtained. It represents the difference between time paid for and time actually spent on production.

**Types of Idle Time:**

**(i) Normal Idle Time** — This is unavoidable and inherent in every production process. Examples include time lost between factory gate and workstation, time for tea breaks, time lost while waiting for work, tools, or materials under routine conditions.

**Accounting Treatment of Normal Idle Time:** The cost of normal idle time should be charged to the **cost of production** by inflating the wage rate. It is treated as a **product cost** and spread over all units produced. For example, if a worker's wages are ₹100 for 10 hours but only 9 hours are productive (1 hour normal idle), the effective wage rate per productive hour is ₹100/9 = ₹11.11, and this inflated rate is used for job costing.

**(ii) Abnormal Idle Time** — This arises due to unforeseen or avoidable causes such as machine breakdown, power failure, strikes, lockouts, floods, or waiting for raw materials due to mismanagement.

**Accounting Treatment of Abnormal Idle Time:** The cost of abnormal idle time should **NOT** be included in the cost of production. It is treated as a **period cost** and charged directly to the **Costing Profit & Loss Account** (or transferred to a separate Abnormal Idle Time Account and then to P&L). It is separ…

Question 15

EXPLAIN the stages in Zero-based budgeting.

Accepted Answer

**Zero-Based Budgeting (ZBB)** is a method of budgeting in which all expenses must be justified and approved for each new period, starting from a 'zero base', regardless of whether the budget is higher or lower than the previous year. Unlike traditional budgeting, it does not use the previous year's figures as a starting point.

**Stages in Zero-Based Budgeting:**

**Stage 1: Identification of Decision Units**
The organisation is divided into **decision units**, which are the smallest organisational entities for which a budget is prepared. Each decision unit may be a department, function, programme, or activity. Each unit manager is made responsible for preparing the budget for their unit from scratch.

**Stage 2: Preparation of Decision Packages**
For each decision unit, a **decision package** is prepared. A decision package is a document that identifies and describes a specific activity in such a manner that management can evaluate it and rank it against other activities competing for limited resources. Each package includes:
- The objectives and purpose of the activity
- The consequences of not performing the activity
- Costs and benefits at different levels of effort
- Alternative ways of performing the activity

Decision packages are prepared at a **minimum level** (the bare minimum to keep the activity going), a **current level** (current level of operation), and an **enhanced level** (above current level).

**Stage 3: Evaluation and Ranking of Decision Packages**
All d…

Question 16

STATE the differences between Job costing and Batch costing.

Accepted Answer

**Differences between Job Costing and Batch Costing**

**1. Meaning:**
Under **Job Costing**, cost is ascertained for each specific job or work order, where each job is unique and executed as per customer's specifications. Under **Batch Costing**, cost is ascertained for a batch (group) of identical or homogeneous units produced together, and the cost per unit is derived by dividing total batch cost by number of units in the batch.

**2. Nature of Production:**
Job costing is suited for **non-repetitive, heterogeneous** production where each job differs from another (e.g., construction, ship-building, printing). Batch costing is suited for **repetitive, homogeneous** production where identical units are produced in lots (e.g., pharmaceuticals, ready-made garments, components manufacturing).

**3. Unit of Cost:**
In job costing, the **cost unit is each individual job or work order**. In batch costing, the **cost unit is the entire batch**, and cost per unit is computed by dividing total batch cost by batch quantity.

**4. Customer Specification:**
Job costing involves production **as per specific customer orders**; each job is customised. Batch costing generally involves production for **stock or anticipated demand**, not necessarily to a specific customer's order.

**5. Size of Production:**
In job costing, the production quantity is **small and specific** to the order. In batch costing, production is carried out in **economical batch quantities** (often determined using Econ…

Question 17

EXPLAIN the treatment of by-product cost in cost accounting.

Accepted Answer

**By-products** are products of relatively minor value that are produced incidentally along with the main product(s) during a manufacturing process. Their cost treatment differs from joint products because their value is insignificant compared to the main product.

**Methods of Accounting for By-products:**

**1. Non-cost Methods (where by-product value is NOT included in cost accounts):**

**(a) Other Income / Miscellaneous Income Method:** The net realisable value (NRV) of the by-product is credited to the Profit & Loss Account as miscellaneous income. No adjustment is made to the cost of the main product. This is the simplest approach and is used when by-product value is negligible.

**(b) Deduction from Cost of Production Method:** The NRV of the by-product is deducted from the **total cost of production** of the main product. This reduces the cost per unit of the main product and is considered more accurate than treating it as income.

**(c) Deduction from Cost of Sales Method:** The NRV of the by-product is deducted from the **cost of goods sold** (instead of cost of production). This method is used when the by-product is sold in the same period it is produced.

**2. Cost Methods (where a portion of joint cost is allocated to the by-product):**

**(a) Standard Cost / Replacement Cost Method:** A **standard or replacement cost** is assigned to the by-product. This amount is credited to the joint process account and charged to the by-product account. The by-product is the…

CA Inter Taxation

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap

Worker	(i) Hourly Rate	(ii) Piece Work	(iii) Rowan
I	Rs.15,200	Rs.24,150	Rs.16,049.69
II	Rs.5,000	Rs.7,500	Rs.6,000
III	Rs.32,400	Rs.36,000	Rs.35,640